New Construction Rental Housing


There is a shortage nationwide
of affordable housing. So why not build
to rent housing? That’s a great idea. And that’s what our guest
has done on today’s show. We’ll get to that
in just a moment. Hey, everyone. I’m Clayton Morris, longtime
real estate investor. And welcome into the
Investing in Real Estate Show. This is a show where
we help you build financial intelligence,
so you can take control of your finances,
empower yourself to go out there and make
a change in your life. Now we’ve had a lot
of guests on the show. We never really talked about
the idea of building to rent, building entire subdivisions in
order to rent them out because of this nationwide shortage. I have a special guest
on the show today. His name is Bruce McNeilage,
and he is the co-founder of Kinloch Partners, LLC. And they build homes
from the ground up. They work with a lot of
different big companies who will come and swoop in and
buy up an entire subdivision. So he knows this topic well. And I want to welcome
Bruce into the show. Bruce, nice to see you today. Welcome into the show. Clayton, thank you very much. I appreciate it. Well, it’s a real
treat having you here. So Bruce, why don’t you give
our audience an overview? How did you get involved
in real estate development? And take us back maybe to
some of your first deals. Sure, I was a financial advisor
for most of my career in 2005. I came up with the idea of
building brand new houses, renting them out, cash
flowing them with the idea at some point in the future
that I would sell them. And so we started in 2005
and 2006 as a small investor. I got to about 57
brand new houses in the middle of
Tennessee, Nashville area. That portfolio was
purchased four years ago by a publicly traded REIT. And during that time period,
we did about 400 houses between Nashville and Atlanta. And we’ve recently gone out
to Greenville, Spartanburg, Columbia, South Carolina and
also Raleigh, Durham, North Carolina. Wow. So this is an interesting topic
and obviously in the headlines lately. And I want to dive into this
and what’s actually going on in the marketplace right now. So a couple of headlines
in the past few weeks about this shortage of homes. Now if anyone watches
this show knows, I like to buy affordable houses
kind of in well established neighborhoods. That’s what I usually do, those
brick, tree-lined streets. They have old growth trees. Because they’ve been there for– post-World War II houses. That’s what I think
makes up a bulk of my portfolio of properties. But a couple of articles
recently highlighting that it’s becoming
increasingly difficult to find those types of deals on a larger
volume scale, and these larger hedge funds are now buying– they’re having a difficult
time trying to buy them up. So instead, they’re
deciding to build them. Can you speak about that? What are you seeing in
the market right now? Sure, so the low
hanging fruit is gone. All of the short sales,
all of the foreclosures and the houses that were
being sold on the courthouse steps, all that’s gone. And so the appetite for these
large hedge funds and rates still remains. It creates more
and more shortages of houses in the United States. And so people like us are being
engaged to build the houses and sell them
directly to the farms. Or in our instance,
we’re building them up for our own portfolio, cash
flowing them with the idea that we may sell
a larger portfolio to the institutional owners. And so that’s what we’re
seeing in the marketplace. And quite frankly, it’s
throughout the country in the major cities that
these funds concentrate on. So those short sales are gone. Those foreclosures are gone. What does that tell you about
the current state of affairs? Is that good? Is that bad? Sure. Well, all it means is all of
the houses that were beat up and the cities that really had
some financial correction from ’08, ’09, and whatnot,
have recovered. And they’ve recovered to a point
that the cap rates, the amount of money we can
make on the houses, has gotten smaller and smaller. So the rehabs, the
houses like that where you could buy them and do large
renovations and make money, that, quite frankly,
has diminished. It’s almost all gone away. So people need more product,
and there is not enough housing in the United States. So quite frankly, people
like us and the larger firms are starting to build
our own and acquire them, both by manufacturing and
building the houses themselves or cutting deals with large
national or regional builders to deliver houses at a discount. And then of course, cash flow
those in their portfolios. So how did you know that that
would be profitable, smart, given the current
state of the market? We keep hearing about, oh, is
there trouble in the housing market, trouble in
the housing market. You know, that’s a
speculative play. You’re taking a gamble on making
sure that these things can then be sold. What were some of the
data you were looking at? Said, no, this is a
really smart move here. So for six decades, the
ownership in the United States of homes, the death
of the American dream has been happening
right before us. And people own less. There’s a smaller percentage
of homeownership in America now as there’s ever been. So that creates the ability,
and that provides us a much larger pool in
which to draw from. Because people aren’t
owning their house. They’re borrowing, and
they’re renting and whatnot. Because quite frankly, maybe
they can’t get mortgages. Maybe they’ve had short sales
or foreclosures, bankruptcies, things like that. And so we have a larger pool
of people in which to draw from to rent the houses, too. And that’s creating
better cash flows for us. Again, there’s limited supply. And it’s driving
those people to us that want to have a nice house,
but simply can’t afford to buy. And so they’ll look to
rent from people like us. So talk about the broader
market in this play right now. What are you seeing more
broadly in the housing market? We keep hearing
housing bubble this. I see literally conflicting
news stories every day. I was scrolling
through my feed today, and I saw, wow, 2018 was one
of the best years of housing on record for sales and pricing. And then I see that,
well, now we’ve got increasing mortgage
rates, and people aren’t buying as many houses. So what’s your general
sense across the country right now, where we are? So a lot of organizations,
media outlets, and whatnot, they talk about
home sales are down. They’re down year over year. The reason why homes
sales have them down is there aren’t
enough homes to sell. You just don’t have enough
inventory at the certain price point. And we work in the
$200,000 to $350,000 range. And although that seems
high as far as prices go, that’s really middle
class entry level or one step above entry level housing. And truthfully,
there’s so much demand that people like builders,
people like folks like us, we just can’t meet the demand. So of course, that’s
driving up prices. But what happened five
or six years ago is developers could not get loans. They didn’t buy enough land. So they haven’t prepared
pads, and subdivisions, and whatnot to build on. And you’re starting to see
those people start to catch up, but they’re catching up
being five years behind. So again, there’s not enough
product in the marketplace. That may look like inventory
and sales are going down, but sales are going down,
quite frankly, because we don’t have enough housing. If we had enough housing, you’d
see sales at a double digit increase around the country. But we don’t have that. So let’s talk about
build to rent. So when you look at the data
on building properties, what things need to make sense
for you before you’re going to take on a project? You know, when something
crosses your desk, what sparks your interest? How do you start
that discussion? Well, first of all, we
want to be in an area where there’s growth, both
job growth, economics, people moving into the area. So we want to be in an
area that’s growing. Good jobs, good schools. Schools are
incredibly important. We need to be in an
area where people seek to live in that area to
get their kids in higher quality schools. Conversely, we get a
better deal on houses in areas that don’t have
highly rated schools. And what we found is
although we get a better price on those houses,
our yield isn’t as good because we have less
and less people looking for those houses. So the build to
rent area or buying to rent area is really
continuing to grow. And I don’t see a
slowdown in the future because again, people
might have been dinged up by short sales,
foreclosures, divorce. They can’t qualify
for a mortgage, or they might not have
the 5% or 10% down. Interest rates are going up. So that’s only
making our business, the build to rent
business, grow. And I don’t see any
change in the future. Now what we look for, other
than the good schools, areas that are growing, we only by
four and five-bedroom houses. People want to say,
why do you only buy four or five-bedroom houses? If you live in the
suburbs and you have two kids, a three-bedroom
house right there, you’re maxed out on. You might have a mother-in-law. You might use a home office. And so a three-bedroom
house only appeals to a small segment
of society, of what people are looking for in houses. We do four and
five-bedroom houses, and that’s enough house
where a person doesn’t have to move or trade up. They already have
enough bedrooms to grow into if the
lifestyle thing changes, like mother-in-law or
having another child. And we also get more money
in rent from those houses. Even if they’re not larger,
the more bedrooms you have, the easier it is to rent. And also, the more
profitable it is because you’re
getting and demanding a higher monthly rental price. So I guess with the four
and five-bedroom play, you’re hoping these
tenants are going to put down roots and
stay for many, many years. Is that right? That’s correct. And so we keep an average tenant
in a brand new house six years. Industry average is about
2 to 2 and 1/2 years. Whether it’s a four
or five-bedroom, people are going to stay longer. They’re going to
establish roots. They’re going to be in the
neighborhood for a longer period of time. And what’s nice about
that is it gives them a sense of community. Kids get used to schools. The husbands and wives make
friends in the neighborhood. And so you don’t have the
same transition where people are moving in and out of houses
based on lifestyle changes or increased size
of their households. And so yes, they stay longer. It’s a more profitable
business for us by [INAUDIBLE].. So let’s talk about
some of the pricing here and what are you putting
into these houses. Are you building entire
new subdivisions? So we’re putting in a park
in the middle with a pool. Where are these located, and
what types of houses actually are you putting together here? Sure. So our houses are
primarily in the suburbs, all within about 30
miles or 30 minutes of the urban core of the city. And many times, the
people are not– they’re not commuting
to the urban core. They’re commuting to an
area around the city. So really, many
times, our tenants only have 15 or
20 minute drives. Traditionally, we don’t put in
amenities in the neighborhood. We’re building the
entire neighborhood. But many times,
we’re doing a portion of the neighborhood, maybe
the back portion that’s left to sell. And usually, there
are pools, clubhouses, playgrounds for kids. And that’s really nice
because, again, that is something that people
want and they ask for. And I will tell you
the negative about that from cash flowing a house
is you have higher HOA fees. So you really have
to balance that. But what we put in,
in houses that really make them attractive,
every one of our houses have granite countertops. Every one of our houses has
a four-piece stainless steel appliance package. You get a microwave,
refrigerator, dishwasher, and range. The range is always
a smooth top range. We do tile in our bathrooms,
garage door openers, all the little things
that you might not get with either a used house
or an entry level house. We really make the
inside of our houses highly desirable with
quality, high end finishes and materials. Interesting. I mean, this kind of blows my
mind a little bit because I talk about the A
class neighborhood can cause some A class problems. And talk me off of that
ledge a little bit. Because you deal with HOAs. Can those shift, make decisions
in your homeowners’ association that adversely
affect the landlord? A lot of moving parts– you’ve
got garage door openers. You’ve got a lot of things
you’re having to put money into to maintain as a landlord. So talk me off that ledge
a little bit, Bruce. So the goal is that we turn
the house over to someone, and all they need
is a toothbrush. I forgot to mention, we do
the 2 inch floorwood blinds, ceiling fans. Anything you would need to make
a house a better experience or a higher quality house
to live in without having to do anything is what we do. As far as any pushback
from the associations or the neighborhoods, we
don’t use for rent signs. We’ve never used for rent signs. So instantly, you can’t identify
our houses as rental houses. We also fertilize
the lawns, make sure we plant a few extra
trees, encourage our tenants to plant flowers. So many times,
when you drive down the street of a community
where we own some houses in, you can’t pick our houses
out than the owners’ houses. And quite frankly,
sometimes theirs are not taken care of as well as ours. And so if I’m doing a
good job, and that’s because if I’m doing a good job,
you’re driving down the street and you can’t pick
my houses out. That’s my goal. And also, I want my people
to have pride of ownership. I want them to treat my houses
as good as I would treat them. And I think a lot of them do
that because they’re brand new, but also, they see themselves
many times buying the house from me in the future. So they actually treat the
houses as if it’s their own. Are you doing any kind of a
rent to own program right out of the gate with folks? Or is that something you discuss
with tenants down the line? So we do something
that’s unique. We will not accept a
deposit of $5,000 or $10,000 and give someone a
definite time of when they have to exercise it,
whether it be 12 or 24 months. Our agreement with our tenants
is at any time in the future– two weeks, two
months, two years– we will sell you the
house a few thousand dollars under fair market
value under appraisal. We’ll help some closing costs. Because truthfully,
that’s what we’re doing. I tell people I don’t
want to collect houses like baseball cards. My job is to cash
flow my properties, get them in the hands of
the people that want them, and then make a good profit
in between that time. But at any point in
the future, our tenants have the ability to buy our
houses with no limitations, whether it be, again,
a number of years. Or I always tell them
if they win the lottery, they can buy the
house next month. Absolutely no restrictions
will tear up the lease. And they can purchase the house. What kind of projects
are you working on now as you forecast out? How far out do you
forecast for where you’re going to be building
your next projects? What are your plans look like? So, yes. We try to buy the dirt. We try to buy the land at
least 12 months in advance, prepare the land, utilities,
roads, things like that. So we’re ready to start building
on it within nine months or so. Now it takes three or four
months to deliver the house. And so it’s like
landing airplanes. We’re constantly developing
land, building houses, renting houses. And what you want to do is you
want to get ahead of demand, so every month, you’re
delivering houses. Every month, you’re
renting houses. And you’ve got to go get
the next neighborhood before the last
one’s rented out. So right now, what
we’re concentrating on is doing small subdivisions
for the back part of– it could be a master-planned
community, where we have a whole
section of one part of a master-planned community. So in essence, it
becomes a village. I call it Kinlock Village, where
all the people are tenants. They all move in within a
few months of each other because the houses are
finished within a few months of each other. So there is part of a community. And because everybody
rents houses, there is no moniker of,
oh, you’re a renter. We’re an owner. We don’t want to be
around people like you. Everybody rents the houses. So nobody is looking
down at anyone because they’re renting a
house versus being an owner. Right, so in those communities,
everyone’s renting in there. How often are those
popping where you will have owners popping in there? And how does that change the
dynamic of the neighborhood? So in our community, we only
sell a few houses every year to parents. Because quite frankly, many of
them don’t have the skill set. They haven’t done
a financial course, like Dave Ramsey type
of thing, where they’re taught how to be successful. And so many people
just never have the skill set to buy a
house, and that’s fine. Some people do. And so our goal, again, is
in our community ourself, and community, or
our entire community, is to get those houses in the
hands of people as quickly as possible. And then eventually, turn
over the neighborhood, where a larger and larger
percentage of houses every year is owned by people that
used to be tenants. And the idea would
be in a few years that it’s an ownership
situation, where there are no more rentals,
that either we sell it to the tenant
that’s in the house or when the tenant
moves out of the house. Instead of re-renting
it, we actually sell that to the next person. Wonderful. So where do you see the
market going over the next two to three years? What is your data telling you
about the health of the housing market? So we operate in the
southeast, which is obviously a highly desirable
area of the country, and also the southwest. We don’t see both a
demand or price increases and appreciation in some
of the middle market area they call the Rust
Belt. And so we see a lot of people moving
to states that have better weather, better opportunity to
play golf, things like that, all year round, and jobs. There are so many automobile
manufacturing jobs that are coming to the southeast
and so many other types of industry that moving out
of the North and the Midwest, that we really see a large,
large income of growth and predicting a very high
robust increase in demand and also in growth
in the southeast. And that’s why my business is
expanding in the southeast. And truthfully, we’re
only located in the south. That’s only where we
want to buy houses. We want to get deep
and become bigger in each one of our markets,
versus maybe spreading ourselves too thin across other
markets throughout the country that may not be as
good as [INAUDIBLE].. Wonderful. Wonderful. So Bruce, what’s
next for you guys? And how can people
connect with you? If I want to come in and buy
an entire subdivision from you, how can I connect with you? Sure, so you can reach us
at kinlochpartners.net. It’s K-I-N-L-O-C-H,
partners.net. We’ve got a great website. It talks about our story,
some articles and media that we’ve been in,
and also, it gives you an inventory of houses we
have available now to rent. And of course, any house
that’s on that site is also available to purchase
when the house becomes vacant in the future. If somebody wants to buy a
small portfolio of houses, five or six houses from us,
we can handle that. If somebody wants to buy a
larger portfolio of 50 houses, we can do something like that. I think it’s very
important that you get pre-qualified to buying
those houses, whether it’s on a residential
basis, buying a few, or buying a larger
amount of houses. And you know, a person that I
view highly of in this market around the country that
does a lot of business is Dan Kraus from
Churchhill Mortgage. And I would highly recommend
working with Dan or someone like that, that’s really
knowledgeable with investors, not only just about retail
folks that are buying one house. But it’s very, very important
that you get pre-approved, and you know what
your purchasing power is, so you know how
many assets you can buy. And then you can kind of predict
cash flow and look at things. And of course, the goal would
be if you buy five houses today, use the positive cash flow, buy
another one and another one. And eventually, hopefully,
you own 10 or 15 houses. You cash flow them, and that’s
really making a difference in your wealth, making
a difference in how you’re going to
retire in the future, and we see a lot of growth. And truthfully, we just
don’t see an end in sight. Owning single family rental
properties, in my belief– and again, I’m
investing my own money in this business–
in my belief, is going to be one of the best
paths to building wealth and building retirement, is
only in these type of assets. Absolutely. I couldn’t agree more. And that’s the basis of my
entire portfolio as well. Thank you so much, Bruce,
for joining us on the show. I really appreciate it. Great. Thank you so much. Real pleasure to have you here. And thanks to all of you for
downloading and subscribing to the show and making
us part of your commute on a regular basis or your
workout and helping you build financial intelligence. Now go out there, take action,
become a real estate investor. I believe it’s the number
one way to build wealth. We’ll see you next
time, everyone.

22 thoughts on “New Construction Rental Housing

  • I actually just had this conversation with my wife over the last couple of weeks. I want to own some townhouse duplexes but there are none available here. This is very interesting I can't wait to listen to your take on the subject.

  • The homes he is trying to sell are probably track home that is poorly constructed and will show major problems within 5 years. When you hear about the attention to what looks good and not the quality of construction. Start to be concerned. I am not surprised that he wants people to buy the houses shortly after renting them. This gets them out of major problems and onto the next turn and burn.

  • All new construction has to be built to code which means these homes will likely last as long as any new home built today. However the most important stuff I would have liked to have heard is: 1) an actual example of how much the land cost 2) home much to built the entire project 3) how much is the gross rent from the project 4) what is the monthly upkeep from the project, i.e.what will be my net cash flow. For me it all comes down to numbers. Come on Clayton that's the most important part..lol Your thoughts?? Thank you very much.

  • Uhm Trump is pushing Feds to lower rates by 1%_thats enough to stimulate buying, but greed will lead to another crash bc lower rates typically result in increases in home prices

  • This guy is smart. Getting higher class tenants that are looking for good schools means less tenant turnover and people that want to stay put and become part of the neighborhood. People who are not struggling to make ends meet. It may not be quite the same percentage cash flow as the C and D class places, but in the end I bet it evens out profit wise and as he mentions, you can’t distinguish them as being rentals and people treat them like their own home. People talk poorly about an HOA but a good one makes for a solid, clean, safe neighborhood.
    Very good to get this perspective on the rental market!

  • The trend I am seeing in my area is splitting a single family home into a multiplex. Individual rooms being leased, it begins to get really ugly quick. To make codes work they sometimes have to run egress stairs to windows, multiple cars parked all around. I feel like it hurts the homeowners in the area.

  • I get this guy's arguments, but I still think renting A to A- properties is not a good proposition for a number of reasons.

  • LOL. Y'all might wanna Google this guy. He's being sued by a bunch of people and is an alleged crook and huckster.

  • I absolutely Love this podcast. I have searched for duplexes or quads. Not much luck or the areas weren’t desirable. I mentioned this exact topic to my husband. Thank you so much for this podcast, keep them coming.

  • Thanks Clayton for a very informative video!!!!

    Would it be possible to do some videos on modular/manufactured homes as rentals?

  • The baby boomers now complain about everything
    because they can't buy everything- as they bought before!

    Has anyone rented to a baby-boomer? Share your stories.

  • What do you think about areas like Colorado where they are building apartments and condos everywhere. I wonder what that will do to the rental market in your opinion? Well I have a big impact or a small impact or neither thank you

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